VISHESH ENTERTAINMENT P. LTD, MUMBAI V. ACIT R 11(1), MUMBAI

ITA 8667/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83823 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 23-07-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 13-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAM BH VIT MISHRA
• Keywords: Opportunity of being heard; Revenue expenditure; Capital expenditure

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND SANJAY GARG, (JM) .. , , ./I.T.A. NO.8667/MUM/2010 ( ! / ASSESSMENT YEAR : 2006-07) M/S VISHESH ENTERTAINMENT PVT LTD., 401, DURGA CHAMBERS, LINKING ROAD, KHAR (W), MUMBAI-400052 / VS. ASTT. COMMISSIONER OF INCOME TAX, RANGE 11(1), MUMBAI. ( '# / APPELLANT) .. ( $%'# / RESPONDENT) ' ./ & ./PAN/GIR NO. : AABCV0631Q '# ' / APPELLANT BY : SHRI K SHIVRAM $%'# ( ' /RESPONDENT BY : SHRI SAMBHVIT MISHRA ) * ( +, / DATE OF HEARING : 28.7.2014 -.! ( +, /DATE OF PRONOUNCEMENT : 12.9.2014 / O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 17.09.2010 PASSED BY LD CIT(A)-3, MUMBAI AND IT REL ATES TO THE ASSESSMENT YEAR 2006-07. 2. THE ASSESSEE HAS RAISED THREE GROUNDS OF APPEAL BEFORE US. AT THE TIME OF HEARING, THE LD. AR SUBMITTED THAT THE GROUND N O.1 RELATES TO DISALLOWANCE OF EXPENDITURE INCURRED ON THE TRAINING OF DIRECTOR IN USA. HE SUBMITTED THAT IDENTICAL CLAIMS MADE IN THE EARLIER YEARS WERE DEC IDED AGAINST THE ASSESSEE BY THE TRIBUNAL. THE ASSESSEE ALSO FURNISHED COPIES O F THE ORDERS PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASES IN ITA NO.305/MUM/ 2009 (AY-2004-05) DATED I.T.A. NO. 8667/MUM/2010 2 25.2.2011 AND ITA NO.1590/MUM/2009 (AY-2005-06) DAT ED 31.3.2011. SINCE IDENTICAL CLAIM MADE BY THE ASSESSEE HAS ALREADY BE EN DECIDED AGAINST THE ASSESSEE IN THE EARLIER YEARS BY THE CO-ORDINATE BE NCHES OF TRIBUNAL, FOLLOWING THE SAME, WE CONFIRM THE ORDER OF LD. CIT(A) ON THI S ISSUE. 3. THE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS G ROUND NO.2 RELATING TO DISALLOWANCE OF INTEREST AND HENCE THE SAID GROUND IS DISMISSED AS NOT PRESSED. 4 THE LAST GROUND PERTAINS TO DISALLOWANCE OF RS.82 ,59,052/- PAID TO M/S TIPS FILMS PVT. LTD AS LIQUIDATING DAMAGES. THE FA CTS RELATING TO THE SAME ARE STATED IN BRIEF. DURING THE YEAR UNDER CONSIDERATI ON, THE ASSESSEE PAID COMPENSATION OF RS.82.59 LAKHS TO M/S TIPS FILM PVT LTD IN CONNECTION WITH FILM FOOTPATH (PREVIOUSLY TITLED AS DAAV) AND CLAIME D THE SAME AS DEDUCTION UNDER THE HEAD LIQUIDATED DAMAGES. M/S TIPS FILM S PVT. LTD HAD FINANCED THE PRODUCTION OF ABOVE SAID FILM. AS PER THE AGREEMEN T DATED 14-02-2002 ENTERED BY THE ASSESSEE WITH M/S TIPS FILMS PVT LTD, THE AM OUNT FINANCED IS TO BE RECOVERED FROM THE PROCEEDS OF DISTRIBUTION OF THE FILM, CITED ABOVE. ACCORDING TO THE ASSESSEE, THE FILM DID NOT FAREWELL AND HENC E THE ABOVE SAID COMPANY COULD NOT RECOVER ITS DUES AS PROVIDED FOR IN THE A GREEMENT DATED 14.2.2002. ACCORDING TO THE ASSESSEE, THE DISPUTE WAS GOING ON BETWEEN THEM AND PURSUANT TO AN AGREEMENT REACHED LATER ON, THE ASSESSEE AGRE ED TO PAY A SUM OF RS.1.80 CRORES AS FINAL SETTLEMENT, WHICH INCLUDED A SUM OF RS.82,59,052/- AS LIQUIDATED DAMAGES. 5. THE AO CONSIDERED THE SAME AS EXPENDITURE RE LATING TO PREVIOUS YEAR. THE AO ALSO TOOK THE VIEW THAT THE SAID AMOUNT SHOULD B E TREATED AS LOSS OF CAPITAL I.T.A. NO. 8667/MUM/2010 3 AND HENCE NOT ALLOWABLE AS DEDUCTION. THOUGH THE A SSESSEE SUBMITTED THAT THE SAID EXPENDITURE WAS INCURRED IN THE NORMAL COURSE CARRYING OF BUSINESS, YET THE ASSESSING OFFICER DID NOT AGREE WITH THE SAID EXPLA NATION AND ACCORDINGLY DISALLOWED THE SAID CLAIM WITH THE FOLLOWING OBSERV ATIONS: 6.3 THE EXPLANATION FILED BY THE ASSESSEE DOES NOT INDICATE WHY THE EXPENDITURE PERTAINING TO PREVIOUS YEARS ARE IN THE BOOKS OF CURRENT YEAR. ASSESSEE HAS NOT BEEN ABLE TO SHOW IF THE SAID LIQU IDATED DAMAGE DID CRYSTALLIZE ONLY DURING THE FINANCIAL YEAR 2005-06. THE BUSINESS EXPEDIENCY OF THE EXPENSES HAS ALSO NOT BEEN ADEQUATELY EXPLAI NED. IT IS ALSO SEEN FROM THE PROFIT AND LOSS ACCOUNT THAT THERE IS NO C ORRESPONDING INCOME WITH RESPECT TO THESE EXPENSES AS THE SAME BELONGS TO PREVIOUS YEARS. THE EXPLANATION FILED BY THE ASSESSEE IS NOT ACCEPT ED AND THE SAID AMOUNT OF RS.82,59,052/- IS DISALLOWED FROM BEING CLAIMED AS REVENUE EXPENDITURE OF THE CURRENT YEAR. 6. IN THE APPEAL FILED BY THE ASSESSEE, THE LD C IT(A) HELD THAT THE CLAIM WAS ACTUALLY FINALIZED BETWEEN THE PARTIES DURING THE P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THE LD CIT(A) , HOWEVER, HELD THAT THERE WAS NO EVIDENCE TO SHOW THAT THE IMPUGNED AMOUNT WA S PAID DURING THE YEAR UNDER CONSIDERATION, SINCE THE LETTER DATED 15.12.2 005 INDICATED THAT THE ASSESSEE HAD TO PAY THE AGREED AMOUNT OF RS.1.80 CR ORES IN NINE MONTHLY INSTALMENTS OF RS.20.00 LAKHS EACH BEGINNING FROM 1 5.01.2006. HE FURTHER HELD THAT THE LIQUIDATED DAMAGES ARE PAYABLE FOR BREACH OF CONTRACT AND HENCE THE SAME CONSTITUTES CAPITAL EXPENDITURE IN THE HANDS O F THE ASSESSEE AS PER THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE C ASE OF SWADESHI COTTON MILLS CO. LTD VS. CIT (63 ITR 65) AND ALSO AS PER THE DEC ISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD (121 TAXMANN 223). ACCORDINGLY THE LD CIT(A) HELD THAT THE LIQUIDATED DAMAGES PAID BY THE ASSESSEE IS A CAPITAL EXPENDITURE AND ACCORD INGLY UPHELD THE DISALLOWANCE MADE BY THE AO. AGGRIEVED, THE ASSESSEE HAS FILED THIS APPEAL BEFORE US. I.T.A. NO. 8667/MUM/2010 4 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERU SED THE RECORD. FROM THE AGREEMENT DATED 14-02-2002 ENTERED BETWEEN THE PART IES, WE NOTICE THAT M/S TIPS FILMS P LTD HAS FINANCED THE ASSESSEE HEREIN A SUM OF RS.6.25 CRORES (RS.4.75 CRORES FOR PRODUCTION OF FILM AND RS.1.50 CRORES TOWARDS PUBLICITY EXPENSES) FOR PRODUCTION OF THE FILM CITED ABOVE. THE ASSESSEE HAS SOLD THE AUDIO AND VIDEO RIGHTS TO M/S TIPS FILMS P LTD FOR A SUM OF RS.1.90 CRORES AND THE SAME WAS AGREED TO BE ADJUSTED AGAINST THE LOAN AMOUNT CITED ABOVE. LATER, BY A LETTER DATED 01-08-2003, THE LOAN AMOUN T WAS INCREASED BY RS.25.00 LAKHS AND THE AMOUNT PAYABLE ON SALE OF AUDIO AND V IDEO RIGHTS WAS INCREASED BY RS.15.00 LAKHS. 8. AS PER CLAUSE 11 OF THE AGREEMENT, THE FIRST PRINT SHOULD BE MADE LATEST BY 31 ST OCTOBER, 2002 WITH FURTHER GRACE PERIOD OF 3 MONTH S. ANY FURTHER DELAY WOULD ENTITLED THE TIPS FILMS P LTD TO CHARGE INTER EST AT 24% P.A. FROM 1 ST FEB., 2003 TILL THE FIRST PRINT IS MADE. WE NOTICE THAT THE ASSESSEE HAS PLACED RELIANCE ON CLAUSE 12 OF THE AGREEMENT TO SUBMIT THAT THE LI QUIDATED DAMAGES WAS PAID IN TERMS OF THE SAID CLAUSE. IN FACT, IN THE LETTER D ATED 14.10.2005 WRITTEN BY TIPS FILMS P LTD ALSO, THERE IS A REFERENCE TO CLAUSE 12 OF THE AGREEMENT. HOWEVER, A CAREFUL PERUSAL OF CLAUSE 12 OF THE AGREEMENT WOULD SHOW THAT THE SAID CLAUSE DOES NOT PROVIDE FOR PAYMENT OF THE LIQUIDATED DAMA GES. IT ONLY PROVIDES THE MODE OF RECOVERY, THE LIEN OVER THE ASSETS OF THE A SSESSEE ETC. 9. THE ASSESSEE HAS FILED ITS ANNUAL REPORT FOR THE YEAR UNDER CONSIDERATION. IN PAGE 12 OF THE PAPER BOOK, THE BREAK-UP DETAILS OF ADVANCE FROM DISTRIBUTORS IS SHOWN. THE SAID LIST SHOWS A BALA NCE OF RS.1,19,98,530/- AGAINST THE NAME OF TIPS FILMS P LTD. THUS, IT IS SEEN TH AT THE ASSESSEE DID NOT FURNISH I.T.A. NO. 8667/MUM/2010 5 ANY DETAILS TO DEMONSTRATE AS TO HOW THE LIQUIDATED DAMAGES FIGURE WAS ARRIVED AT. WE NOTICE FROM THE AGREEMENT THAT THE CLAUSES OF THE SAME DO PRESCRIBE A METHODOLOGY TO RECOVER THE LOAN AMOUNT, WHICH INCLU DED RECOVERY THROUGH COLLECTIONS MADE ON SALE OF FILM RIGHTS. HOWEVER, WE NOTICE THAT THE ASSESSEE HAS FAILED TO FURNISH THE DETAILS OF THE RECOVERY S O FAR MADE BY M/S TIPS FILMS P LTD, THE DETAILS OF SHORT FALL AMOUNT AND ALSO THE BASIS HOW THE SETTLEMENT WAS REACHED AT RS.1.80 CRORES. WE HAVE ALREADY NOTICED THAT THE CLAUSE 12 DOES NOT PROVIDE FOR PAYMENT OF LIQUIDATED DAMAGES. IN THAT CASE, IT IS NOT UNDERSTANDABLE AS TO HOW THE ASSESSEE AGREED FOR PA YMENT OF THE SO CALLED LIQUIDATED DAMAGES. 10. THE PAYMENT OF LIQUIDATED DAMAGES MAY BE ON CAPITAL ACCOUNT OR ON REVENUE ACCOUNT. ITS NATURE WOULD DEPEND UPON THE PURPOSE FOR WHICH IT IS PAID. GENERALLY LIQUIDATED DAMAGES ARE PAID BY THE PARTY WHO BREACHES THE TERMS OF CONTRACT. THE OBJECTIVE BEHIND PAYMENT OF LIQUIDATED DAMAGES IS TO RESTORE THE OTHER PERSON TO THE SAME POSITION, IF T HERE WAS NO BREACH OF CONTRACT. ACCORDINGLY, IF THE LIQUIDATED DAMAGES ARE PAID IN CONNECTION WITH THE CAPITAL TRANSACTION, THE SAME WOULD CONSTITUTE CAPITAL EXPE NDITURE IN THE HANDS OF THE PAYER AND IF IT IS PAID FOR A REVENUE TRANSACTION, THE SAME WOULD CONSTITUTE REVENUE EXPENDITURE. 11. IN THE INSTANT CASE, WE HAVE NOTICED THAT THE ASSESSEE HAS AVAILED LOAN FROM M/S TIPS FILMS P LTD. THE AGREEMENT ENTERED B ETWEEN THE PARTIES ALSO PROVIDE FOR PAYMENT OF INTEREST IN CASE OF DELAY IN COMPLETING THE PRODUCTION. IF THE LIQUIDATED DAMAGES WERE PAID ON ACCOUNT OF FAIL URE TO REPAY THE LOAN THEN, IN OUR VIEW, THE PAYMENTS RELATING TO THE SAME WOULD F ALL IN THE CATEGORY OF CAPITAL I.T.A. NO. 8667/MUM/2010 6 EXPENDITURE. HOWEVER, IF THE LIQUIDATED DAMAGES WE RE PAID TO COMPENSATE THE LENDER TOWARDS INTEREST, THEN IT WOULD FALL IN THE CATEGORY OF REVENUE EXPENDITURE. SINCE THE FACTS SURROUNDING THE PAYME NT OF LIQUIDATED DAMAGES ARE NOT FORTH COMING FROM THE RECORD, WE ARE UNABLE TO EXPRESS ANY OPINION ABOUT THE NATURE OF THE LIQUIDATED DAMAGES PAID BY THE AS SESSEE. 12. IN THE ABSENCE OF DETAILS, WE ARE OF THE VIE W THAT THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF THE ASSESSING OFFICER IN THE LIGHT OF DISCUSSIONS MADE SUPRA. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD C IT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECTION T O EXAMINE THIS ISSUE AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA AND TAKE APPROP RIATE DECISION IN ACCORDANCE WITH THE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSE SSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COUR T ON 12TH SEP, 2014 . -.! ) /0 1 2 12TH SEP, 2014 . ( * 3 SD SD ( /SANJAY GARG) ( .. / B.R. BASKARAN ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / ) * MUMBAI: 12TH SEP,2014. . . ./ SRL , SR. PS I.T.A. NO. 8667/MUM/2010 7 ! '#$%& '&($ / COPY OF THE ORDER FORWARDED TO : 1. '# / THE APPELLANT 2. $%'# / THE RESPONDENT. 3. ) 8+ ( ) / THE CIT(A)- CONCERNED 4. ) 8+ / CIT CONCERNED 5. 9 : $+ ; , , ; , / ) * / DR, ITAT, MUMBAI CONCERNED 6. < * / GUARD FILE. = ) / BY ORDER, TRUE COPY > (ASSTT. 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